Technical Stock Market Report

The good news is: New lows remained insignificant in spite of a rough week.

The Negatives: New highs have remained problematic on the NYSE.

The chart below covers the past 6 months showing the S&P 500 (SPX) in red and a 10% trend (19 day EMA) of NYSE new highs (NY NH) in green. Dashed vertical lines have been drawn on the 1st trading day of each month.

NY NH turned down last week in spite of the SPX holding near its all time high.

The Positives: The number of new lows has remained insignificant.

The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of NASDAQ new highs / (new highs + new lows), (OTC HL Ratio), in red. Dashed horizontal lines have been drawn at 10% levels for the indicator, the line is solid at the neutral 50% level.

OTC HL Ratio closed at 92% on Friday, a little below where it was last week, but still extremely strong.

There are trading systems that impose a NO SELL filter when variations of this indicator are above 80%.

The chart below is similar to the one above except is shows the SPX in red and NY HL Ratio, in blue, has been calculated from NYSE data.

NY HL Ratio fell sharply to 73% on Friday, but still remains well into positive territory.

Seasonality: Next week includes the last 3 trading days of July and the 1st 2 trading days of August during the 1st year of the Presidential Cycle.

The tables below show the daily return on a percentage basis for the last 3 trading days of July and the 1st 2 trading days of August during the 1st year of the Presidential Cycle.

OTC data covers the period from 1963 – 2012 while SPX data runs from 1928 - 2012. There are summaries for both the 1st year of the Presidential Cycle and all years combined.

Average returns for the coming week have been stronger during the 1st year of the Presidential Cycle than other years.

Report for the last 3 days of July and the first 2 days of August.

The number following the year represents its position in the Presidential Cycle.

The number following the daily return represents the day of the week;

1 = Monday, 2 = Tuesday etc.

Money supply (M2): The money supply chart was provided by Gordon Harms. Money supply growth got back on track with its elevated trend.

August: Since 1963, over all years, the OTC in August has been up 60% of the time with an average gain of 0.4%. During the 1st year of the Presidential Cycle the OTC in August has been up 42% of the time with an average loss of -0.2%. The best August ever for the OTC was 2000 (+11.7%), the worst 1998 (-19.9%).

The average month has 21 trading days. The chart below has been calculated by averaging the daily percentage change for each of the 1st 11 trading days and each of the last 10. In months when there were more than 21 trading days some of the days in the middle were not counted. In months when there were less than 21 trading days some of the days in the middle of the month were counted twice. Dashed vertical lines have been drawn after the 1st trading day and at 5 trading day intervals after that. The line is solid on the 11th trading day, the dividing point.

In the chart below the blue line shows the average daily performance of the OTC in August over all years since 1963, while the green line shows the average during the 1st year of the Presidential Cycle over the same period.

Since 1928 the SPX has been up 60% of the time in August with an average gain of 0.7%. During the 1st year of the Presidential Cycle the SPX has been up 48% of the time with an average gain of 0.0%. The best August ever for the SPX was 1932 (+37.5%) the worst 1998 (-14.6%).

The chart below is similar to the one above except it shows the average daily performance over all years since 1928 for the SPX in August in red and the average daily performance during the 1st year of the Presidential Cycle, over the same period, in green.

Since 1979 the Russell 2000 (R2K) has been up 59% of the time in August with an average gain of 0.3%. During the 1st year of the Presidential Cycle the R2K has been up 50% of the time with an average loss of -0.4%. The best August ever for the R2K, 1984 (+11.5%), the worst 1998 (-19.5%)

The chart below is similar to those above except it shows the average daily performance of the R2K, over all years since 1979, in August in magenta and the average daily performance during the 1st year of the Presidential Cycle in green.

Since 1885 the Dow Jones Industrial Average (DJIA) has been up 65% of the time in August with an average gain of 1.3%. During the 1st year of the Presidential Cycle the DJIA has been up 56% of the time in August with an average gain of 0.9%. The best August ever for the DJIA 1932 (+34.8%), the worst 1998 (-15.1%)

The chart below is similar to those above except it shows the average daily performance over all years for the DJIA in August in cyan and the average performance during the 1st year of the Presidential Cycle in green.

Conclusion

Seasonally last week has been strong…after that August has been iffy. However, the Fed has assured us they will continue to chip in $85b a month so things should not get too bad.

I expect the major averages to be higher on Friday August 2 than they were on Friday July 26. Last week the Dow Jones Industrial Average and the OTC were up a little while the SPX and Russell 2000 were down a little so I am calling last weeks positive forecast a tie.

Disclaimer: Mike Burk is an employee and principal of Alpha Investment Management (Alpha) a registered investment advisor. Charts and figures presented herein are believed to be reliable but we cannot attest to their accuracy. Recent (last 10-15 yrs.) data has been supplied by CSI (csidata.com), FastTrack (fasttrack.net), Quotes Plus (qp2.com) and the Wall Street Journal (wsj.com). Historical data is from Barron’s and ISI price books. The views expressed dare provided for information purposes only and should not be construed in any way as investment advice. Furthermore, the opinions expressed may change without notice.

Mike Burk began developing equity trading systems in the early 1980's. Through the 1990's he marketed an equity trading system called MIRAT based on breadth indicators, but, primarily new lows. In the early days of this century he developed the seasonal trading strategies currently used by Alpha Investment Management of Cincinnati. Mr. Burk has been writing equity market newsletters since the early 1990's. During the past 10 years the letter observes both breadth and seasonal strategies.